Structuring Your Borrowings.
Finance (lending) and securities mostly go hand-in-hand. We say mostly, because some small personal lending is unsecured, but generally most lending is secured. The most common forms of security that borrowers grant are mortgages, personal guarantees and security interests over personal property. These differ from mortgages because mortgages are granted over land (real estate) where security interests are given over property of the borrower (e.g. motor vehicles or business assets).
It is our job to advise not only the detail surrounding loan agreements but more importantly the security arrangements.
When a client visits us with a refinancing matter, it is our job to advise them not only the detail surrounding the loan agreements (under the Credit Contracts and Consumer Finance Act we have a duty of disclosure of the terms) but more importantly the security arrangements. We often find that there are cross-securities between various entities (companies, trusts etc) that are required by banks and this can come as a surprise to our clients.
Clients restructure their finances for a variety of reasons.
Banks can offer cash incentives for people to move their loans to them, or offer lower interest rates than competitors. Another reason is banks have different lending requirements for businesses than they do for individuals and often this lending is with different banks. So we frequently find that when money is required for a business, it involves clients' personal assets to be given as security and so the same bank needs to be involved and switches occur then.
The work we do in this area can sometimes be complex and involve a myriad of issues, particularly if different entities are involved.
Business.
For example, if companies are asked to give guarantees and that company has minority shareholders unrelated to the client, we often have to consider whether all shareholders need to approve the transaction.
Trusts.
The same applies to trusts. Some professional trustees are kept in the dark when clients restructure their arrangements and understandably are not comfortable with “rubber stamping” the documents. Because trustees have duties to the beneficiaries of the trust, if the trust is giving security in favour of another party, this potentially places the trust in a position where its assets are at risk for no plausible benefit and so care is required.
Guarantors.
The giving of guarantees can also cause other problems. Often clients will ask why lawyers require the guarantors (the parties giving the guarantee) to seek independent legal advice on the giving of the guarantee. This is simply because of the conflict that is inherent. Lawyers act for the borrowers and protect their interests, and it is certainly in their interests for the guarantors to sign the guarantee. Yet by this action, the guarantors are being placed in a position that potentially affects them if the guarantee is enforced. So they have a different interest than the borrowers and need to be fully appraised of their potential liability. Guarantors are treated at law as being the original party that borrowed the money.
If you feel you could use some specialist advice, don’t hesitate to contact the Property or Commercial Team.
